Stephen Schwartz

July 24, 2012 7:25 AM

Last week, the U.S. Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations released a report and held hearings on the giant British-based HSBC bank. HSBC Holdings was ranked as the sixth-largest public company in the world by Forbes in 2011, with assets of $2.5 trillion.

The Senate subcommittee, led by Carl Levin (D, Mich.) and Tom Coburn (R, Okla.), conducted a yearlong probe of HSBC Bank USA, N.A., known as HBUS, a major platform for HSBC’s expansive operations. According to the subcommittee’s press release, HSBC “exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks.”

The results of the HSBC inquiry are both damning and enigmatic. The subcommittee’s report, running 340 pages, is titled, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History.” The report is supplemented, separately, by 539 pages of exhibits.

HSBC is charged with laxity in its anti-money laundering (AML) controls. This issue was aggravated by the inadequacy of its federal regulator, the Office for the Comptroller of the Currency (OCC), in monitoring “$60 trillion in wire transfer and account activity; a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity; and a failure to conduct AML due diligence before opening accounts for HSBC affiliates. Subcommittee investigators found that the OCC had failed to take a single enforcement action against the bank, formal or informal, over the previous six years, despite ample evidence of AML problems.”

The subcommittee investigated five “areas of abuse.” These included, first, “service to high-risk affiliates,” notably HSBC Bank Mexico (HBMX), which was maintained as a “low-risk client.” HBMX transferred $7 billion in U.S. paper money to HBUS in 2007-08, income that Mexican and U.S. authorities surmised came from illicit drug sales.

The bank was next accused of evading oversight by the U.S. Treasury’s Office of Foreign Asset Control (OFAC). The Subcommittee press release stated bluntly, “Foreign HSBC banks actively circumvented U.S. safeguards at HBUS designed to block transactions involving terrorists, drug lords, and rogue regimes. In one case examined by the Subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS accounts over seven years without disclosing the transactions’ links to Iran.”

Third, the subcommittee charged HBUS with “Disregarding Terrorist Financing Links. HBUS provided U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.”

The two final areas of scrutiny appear of lesser significance when compared with services to drug smugglers, Iran, and Saudi-based radicals. They involve “Suspicious Bulk Travelers Checks,” in which HSBC “cleared $290 million in obviously suspicious U.S. travelers cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business,” and “Offering Bearer Share Accounts.” Under the latter heading, the subcommittee states that “HSBC offered more than 2,000 accounts to bearer share corporations, despite the high risk of money laundering and illicit conduct that results since their ownership can be readily transferred without a trail.”

In dealing with Iran, the subcommittee found that “from 2000 to 2010... HSBC affiliates sending OFAC sensitive transactions involving Iran through their U.S. dollar correspondent accounts at HBUS took steps to conceal them, including by deleting references to Iran from the payment instructions or by characterizing the transaction as a transfer between banks in permitted jurisdictions without disclosing any Iranian connection.”

The Senate investigators additionally found HSBC doing business with Burma, Cuba, North Korea, and Sudan, along with individuals on the roster of “specially designated nationals” (SDN) maintained by the Treasury Department, “although to a much lesser extent than those related to Iran.” The SDN list includes “individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.”

But the subcommittee report is especially fascinating in its review of HSBC’s relations with Al Rajhi Bank, the largest private bank in Saudi Arabia. Through all the developments catalogued below, spanning the decade since the terrorist atrocities of September 11, 2001, HSBC “chose to provide Al Rajhi Bank with banking services on a global basis,” according to the subcommittee.

As the report recalls, “After the 9-11 terrorist attack on the United States in 2001, evidence began to emerge that Al Rajhi Bank and some of its owners had links to organizations associated with financing terrorism, including that one of the bank’s founders was an early financial benefactor of al Qaeda.”

The Senate subcommittee cites the 2004 9-11 Commission Report, and references the “Golden Chain,” a roster of “financiers in Saudi Arabia and the Persian Gulf states” involved in supporting Osama bin Laden in the creation of al Qaeda.

During a search in 2002 by Bosnian government officials at the Sarajevo office of the Benevolence International Foundation (BIF), a Saudi charity designated as a terrorist organization by the U.S. Treasury, the Bosnians seized a CD-ROM and computer hard drive with numerous al Qaeda documents. The data was soon turned over to the U.S. authorities, and included the hand-written, Arabic-language “Golden Chain” list. Suleiman Bin Abdul Aziz Al Rajhi, a leading executive of the bank named for his family, appeared in the “Golden Chain.”

Suleiman Al Rajhi, as the new subcommittee report reminds us, was also creator in 1983 of the SAAR Foundation, the center of a complex of enterprises in Herndon, Virginia, searched by treasury agents in 2002 during an operation known as “GreenQuest.” The GreenQuest targets encompassed a major network in the U.S. supporting Wahhabism, the ultrafundamentalist Islamist ideology and official sect in Saudi Arabia.

The subcommittee report quotes extensively from a federal affidavit applying for a search warrant to examine the Herndon properties. The Safa Trust, another of the GreenQuest targets, had been established in 1996, and replaced the SAAR Foundation, which shut down in 2000. The Safa “group,” according to the affidavit, directed funds to the Palestinian Islamic Jihad/Shikaki Faction and to Hamas.

After media coverage in 2002, the GreenQuest investigation languished. As the subcommittee report on HSBC says, “neither the SAAR Foundation or Safa Trust has been charged with any wrongdoing.” But the subcommittee report contains other important details of the labyrinthine aftermath of the GreenQuest action. Some 200 boxes of information collected by treasury agents in GreenQuest were returned to the “Herndon group” after about 18 months, but were subpoenaed again in 2006 by a federal grand jury. The Al Rajhi businesses and nonprofits refused to hand over the materials until a court imposed civil contempt fines on them.

In 2003, according to the Senate subcommittee, the Central Intelligence Agency produced a classified report entitled “Al Rajhi Bank: Conduit for Extremist Finance.” A citation from the CIA analysis in the Senate subcommittee report affirms, “Islamic extremists have used Al Rajhi Banking & Investment Corporation (ARABIC) since at least the mid-1990s as a conduit for terrorist transactions... Senior Al Rajhi family members have long supported Islamic extremists and probably know that terrorists use their bank… The Al Rajhis know they are under scrutiny and have moved to conceal their activities from financial regulatory authorities.”

The Al Rajhi Bank figured in the 2005 indictment of one of its clients, the Saudi-based Al-Haramain Islamic Foundation, a designated terrorist organization operated from Ashland, Oregon, among many places around the world. Pirouz Sadeghaty, an Al-Haramain official, was convicted of terror financing and sentenced to almost three years in prison. Al Rajhi Bank in 2010 refused to furnish authenticated bank documents for use in the Al-Haramain case.

Finally, Al Rajhi Bank was utilized by “several of the hijackers in the 9-11 terrorist attack, including Abdulaziz Al-Omari who was aboard American Airlines Flight 11,” the first aircraft to strike the World Trade Center. In discussing HSBC’s relations with Al Rajhi Bank, the Senate subcommittee declares, “Taken together, the information – the Al Qaeda Golden Chain document, the 2002 search of Al Rajhi-related entities in Virginia, the 2003 CIA report, the 2005 Al-Haramain Foundation indictment and trial, the 2007 media reports, the 2010 refusal to provide bank documents in a terrorist-financing trial, and the multiple links to suspect banks and accountholders – present an unusual array of troubling allegations… HSBC was fully aware of the suspicions that Al Rajhi Bank and its owners were associated with terrorist financing, describing many of the alleged links in [HSBC’s] Al Rajhi Bank client profile. In addition, despite all the allegations, neither [Al Rajhi Bank] nor its owners have ever been charged in any country with financing terrorism or providing material support to terrorists.”

The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations has dedicated a worthy effort to exposing the questionable practices of HSBC, a British bank, in dealing with probable Mexican narcotics traffickers, Iran, and Saudi financiers involved with terrorism. But 10 years after 9/11, much of the Saudi file on financing of violent extremism remains opaque. The subcommittee report illustrates dramatically that a full investigation of Saudi Arabian involvement in global terrorism remains necessary.